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Thursday, July 2, 2020

PSPRS investment returns through April 2020

The following table shows PSPRS' investment returns, gross of fees*, versus the Russell 3000 through April 2020, the tenth month of fiscal year (FY) 2020, with the past six FY end returns included for comparison:

Report PSPRS PSPRS Russell 3000 Russell 3000
Date Month End Fiscal YTD Month End Fiscal YTD
6/30/2014 0.78% 13.82% 2.51% 25.22%
6/30/2015 -0.73% 4.21% -1.67% 7.29%
6/30/2016 -0.32% 1.06% 0.21% 2.14%
6/30/2017 0.22% 12.48% 0.90% 18.51%
6/30/2018 -0.66% 7.76% 0.66% 14.78%
6/30/2019 2.48% 6.05% 7.02% 8.98%

7/31/2019 0.58% 0.58% 1.62% 1.62%
8/30/2019** -0.77% -0.19% -2.04% -0.58%
9/30/2019 1.32% 1.13% 1.76% 1.16%
10/31/2019 1.14% 2.28% 2.15% 3.34%
11/30/2019 1.27% 3.58% 3.80% 7.27%
12/31/2019 1.56% 5.20% 2.89% 10.37%
1/31/2020** -0.32% 4.88% -0.11% 10.25%
2/29/2020 -3.05% 1.83% -8.19% 1.22%
3/31/2020 -6.17% -4.46% -13.75% -12.70%
4/30/2020 3.54% -1.07% 13.24% -1.14%

There is usually a two-month lag in PSPRS reporting its investment returns.

Fiscal year 2020 is mercifully over.  What initially looked like a repeat of 2009 just a few months ago appears to have stabilized, and the market gains of the first six months of the fiscal year will lessen the impact of the second six months.  Based on the FTSE Russell Index Calculator, the FY 2020 return for the the Russell 3000 was 6.53%, with 5.35% earned in May and 2.29% earned in June.  If PSPRS holds to its past pattern, I suspect it will end the year with a return of 3.25% to 4.25%, well below its expected rate of return of 7.3%, which for actuarial purposes means it lost money for the year.

I am sure many of you are noticing the same thing I am.  As of April 30, 2020, there is virtually no difference between PSPRS and the Russell 3000 in FY 2020 returns.  The brain trust that had run PSPRS for many years (Jared Smout, Ryan Parham, Mark Steed, Christian Palmer, Brian Tobin, Will Buvidas, et. al.) have told us for years to trust the process, that the years of lagging returns were the price we all had to pay to protect PSPRS from the next big crisis.  Well, guess what?  The crisis came, and PSPRS did no better than the Russell 3000.

But, but, but their research paper, "Modern Pension Fund Diversification," was in the peer-reviewed academic journal, Journal of Asset Management.  They won awards and had magazine profiles.  Their Chief Investment Officer was honored by Insitutional Investor magazine.  In fact, their whole staff has been honored for their crackerjack performance.  It's not their fault that reality didn't cooperate.

Here's some insight from a man with an actual history of success, Bill Parcells, who said, "You are what your record says you are."  And what is PSPRS' record?  It has an annualized ten-year return of 6.58% versus the Russell 3000's 11.29%.  That extra 4.71% compounded over ten years on a $10 billon portfolio amounts to over $5.8 billion dollars in increased earnings.  Remember also that the 6.58% should be a half-percent less when fees are subtracted, costing PSPRS another $800 million in earnings.  The additional annualized 2.27% Arizona State Retirement System (ASRS) earned compared to PSPRS (10.40% versus 8.16%, net of fees) through FY 2019 would bring and additional $2.5 billion in earnins on that $10 billion portfolio.  Even the PSPRS' Cancer Insurance Policy (CIP) has a FY-to-date return of -0.98%, bettering PSPRS, and an annulized ten-year return of 6.10%, net of fees, virtually identical to PSPRS when we subtract the half-percent in fees from PSPRS' annualizecd ten-year return.  Keep in mind that the CIP is invested much like the average individual investor: 25% in US stocks, 25% in international stocks, 30% in fixed income, 10% in inflation-protected bonds, 5% in gold, and 5% in cash.

There is simply no metric under which we can call PSPRS' investment strategy a success.  It fails against the Russell 3000, ASRS, and its own CIP.  The strategy is a loser, and any of its remaining proponents should be demoted or forced out of PSPRS.  I note all this with a hope that new PSPRS Administrator Michael Townsend  and the new Board of Trustees Chairman and vice-Chariman are going to change things.  The rotten root of PSPRS, Jared Smout, is long gone, and the bumbling leadership of past public safety Trustees should no longer be a hindrance to real reform.

You won't hear this from PSPRS' spokesman Christian Palmer, but PSPRS has another accolade.  According to Center for Retirement Research at Boston College (CRR), PSPRS has the distinction of being one of the 20 lowest-funded pension in the US.  According to the CRR's May 2020 brief "2020 Update: Market Decline Worsens the Outlook for Public Plans," PSPRS is the 16th worst-funded pension in the US at 47.2%.  The paper goes into detail about what the potential effect on these 20 pensions if the market does not recover quickly.  While PSPRS is better off than the others listed with positive cash flow and the third-highest asset to benefit ratio, this is cold comfort when we consider that this PSPRS' situation after a 10-year long bull market.

On a lighter note is this June 4, 2020 story you might have missed by Vince Barone in the New York Post, "Last person to receive pension from American Civil War dead at 90."  While Irene Triplett received only $73.13 a month, that monthly benefit for a war that ended 155 years ago shows the long-term costs of a pension system.  You can read more about her and her family in this May 9,2014 article in the Wall Street Journal by Michael M. Phillips.

To all PSPRS members, please look out for yourselves and each other.

* Returns, gross of fees, are used because PSPRS usually does not report returns, net of fees paid to outside agencies, except on the final report of the fiscal year.  Returns, gross of fees, are used in the table for consistency.  Returns, net of fees, were 13.28% in FY 2014, 3.68% in FY 2015, 0.63% in FY 2016, 11.85% in FY 2017, 7.07% in FY 2018, and 5.50% in FY 2019.

** No monthly returns were reported for these months.  PSPRS returns for these months were estimated using the preceding and following months' returns. The FTSE Russell Index Calculator was used to obtain Russell 3000 returns for these months.

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